Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment won't increase beyond a fixed amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at 562 320-0510. We answer questions about different types of loans every day.

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